Product Startup Podcast Episode 085: Scale a Product After Crowdfunding

00:00:00 Kevin Mako: Hello, product innovators. Today we learn from the founder of a multi-million dollar international interactive toy product and how to scale up to the big leagues after launching your product through a successful crowdfunding campaign.

00:00:13 Narrator: You're listening to the product startup podcast. The show that helps bring your product idea to life by chatting with successful inventors, product developers,

00:00:24 Narrator: manufacturers, and hardware industry professionals. Our goal here is to get to the bottom of what makes a product successful. From initial idea to getting your product on store's share.

00:00:32 Narrator: We're taking you step by step to build a functional product and scale your product business. Hosted by Kevin Mako, one of North America's leading experts on hardware development for small product businesses.

00:00:47 Narrator: Now, onto the show.

00:00:49 Kevin Mako: Welcome back, everyone. Today I'm very excited to introduce Ben Drury to the show. Ben is the founder of Yoto Play, a connected hardware toy product for kids. Yoto just recently raised $17 million in Series A financing. Before that, Yoto launched their physical product.

00:01:02 Kevin Mako: by a successful crowdfunding campaign. So today, Ben is going to share some valuable knowledge in how inventors, startups, and small manufacturers can grow and scale their products after they finish their crowdfunding campaign in order to get to those big time worldwide sales.

00:01:16 Kevin Mako: Now, on to the episode. Ben, welcome to the show. Hey, Kevin. How are you doing? Good, good. Excited to have you on the show today. Talk all things about scaling after crowdfunding. But first and foremost, why don't you give us a bit of background of your relevance to this because I think it's an interesting story

00:01:31 Ben Drury: that led you into, in Europe. Sure, yeah. Let me just tell you about my, my previous startup, because it is relevant. In 2004, I founded a business called 7 Digital, which is a digital music platform business,

00:01:43 Ben Drury: but very focused on B2B rather than B2C. So we basically aggregated and licensed the world's music and then made that available by a set of robust APIs to third parties. The reason I mentioned it is in the latter years of that business, we mostly were doing deals with hardware

00:01:58 Ben Drury: companies. So our big customers with people like BlackBerry and Samsung, HTC, HPLG, almost anyone who wasn't Apple fundamentally, who really wanted to build their own digital music service into their

00:02:11 Ben Drury: own hardware devices, but didn't want to have to deal with the licensing, which is incredibly complicated in music, and didn't want to have to build the tech, and then they're all the reporting backend and things like that. So we were doing that for probably the last five years

00:02:24 Ben Drury: of that business and gained a lot of experience. We were building digital music into all kinds of crazy devices like connected fridges from LG and car head units from QNX and even light bulbs.

00:02:36 Ben Drury: There was one company that had a had this connected light bulb with a little speaker in it and it was designed to go into like hairdressers and small stores and they wanted to build digital music into it. And we're like, yeah, why not? We just gave them an SDK and some APIs and off they went.

00:02:50 Ben Drury: And used it that public, right? Yeah, we took the company public in 2014. It was a small IPO in the UK, not a glamorous NASDAQ or bell ringing float in the US, but it was still an IPO.

00:03:03 Ben Drury: And actually, around that time, happened to have kids. And my co-founder, Philip, also had kids with the CTO. And it was really that sort of life-changing moment of having kids and taking a company

00:03:16 Ben Drury: public and then actually stepping down from that previous company, that really was the inspiration behind Yoto. So although we had, both of us had never done hardware before, we'd worked. with a lot of hardware companies and we've built up quite a lot of experience.

00:03:30 Kevin Mako: And we were like, well, how hard, how hard can it really be to do hardware?

00:03:35 Kevin Mako: And, you know, it became a, Yoto became a huge success. So what, what really kicked that off between going public with your software company, starting to work with the hardware companies?

00:03:43 Ben Drury: And then describe what Yoto is and how you kind of came about that idea and started working on it. So, yeah, sure. So Yoto is a product for kids. It's a connected speaker for kids that puts kids at the heart of the experience.

00:03:56 Ben Drury: So we basically have these NFC cards that we use that kids can put inside our speaker and that triggers the playback of music, stories, podcasts,

00:04:06 Ben Drury: radio, all very carefully curated and safe and secure for children. And our mantra really there is kids in control. The whole experience puts them at the heart of the experience.

00:04:17 Ben Drury: And it was the joint fact, really the history of doing digital music and working on those hardware companies, having kids and having a sense that we wanted, we didn't want to put an iPad in front of a one-year-old or a two-year-old. We really wanted to have access to the

00:04:31 Ben Drury: amazing content on the internet, but very audio-centric. We kind of really believe in the power of audio for creativity and imagination,

00:04:40 Ben Drury: as opposed to screen-based content, which doesn't, kind of almost does all the imagination for you with, with the moving images. So that was really

00:04:48 Ben Drury: the basic idea behind, behind Yoto. And we're both, at our heart, we're both geeks. We're both hackers.

00:04:56 Ben Drury: we got the soldering irons out and we were fascinated by raspberry pie which is a big thing in the UK so with with some raspberry pies and and buying a few components and hacking things together we

00:05:09 Ben Drury: basically built a basic prototype so this was way back in like 2005 2006 it would have been

00:05:18 Ben Drury: now 2020 sorry no I meant I meant I meant 2015 2016 I just missed the whole decade that

00:05:27 Ben Drury: time flies especially in hardware yeah so um we basically kind of built this product for our own kits and we started testing it was really i mean the first product was pretty ugly we were basically

00:05:40 Ben Drury: we didn't even know how to do 3D printing so we were basically doing laser cutting we were like laser cutting slices of wood and slices of perspex to build this kind of prototype but we got it working

00:05:50 Ben Drury: and we could see um even from our kids which were very young at time we could see that they could control it, that they were engaged by it. It was something that was fascinating to them. So I thought, yeah, fine.

00:06:03 Ben Drury: And then we started building more prototypes. We tested it with some other families. And then we're thinking, okay, yeah, this is, this seems to be a thing.

00:06:10 Ben Drury: And then a bit of a breakthrough was we met our first employee, a guy called Tom, who's an industrial designer by trade in one of the top colleges. And he'd had, he'd founded his own business

00:06:21 Ben Drury: doing physical enclosures for iPads. And he'd also

00:06:25 Kevin Mako: had a kid recently, so basically it was a coming together of minds, and he took our very early ugly prototype and turned into something more beautiful. And it was at that point, we decided, okay, let's really test the market for this. Let's go on to Kickstarter.

00:06:41 Kevin Mako: Yeah, that's great. So, and this is what I'm quite excited to talk about because you chose Kickstarter as a launch platform, but then you scale to be a massive, you know, children's product, essentially after that,

00:06:54 Kevin Mako: hardware product, which obviously integrates with tech. And I'm really interested how you use that Raspberry Pi as well, because we use that in a lot of prototyping. I mean, for those who haven't used a Raspberry Pi or similar technology, basically it's a small computer.

00:07:08 Kevin Mako: And you can do a lot of things with it. And it's amazing for early, especially for connected devices or electronic devices in hardware. It's an amazing platform to test and prototype how your product's going to work. You can program a variety of things. And basically, the sky's the limit.

00:07:22 Kevin Mako: Essentially, just imagine it's a tiny computer. your hardware product that has all sorts of different apps and APIs and different things

00:07:29 Ben Drury: that you can code into it. And it's great that you use that to actually validate the model to prove the prototype and then you figured out how to productize it, then went to crowdfunding. So what happened in crowdfunding? And then we'll get to the meet of this conversation, which is how do you then scale

00:07:43 Ben Drury: after a successful crowdfunding campaign? Sure. So yeah,

00:07:47 Ben Drury: back to Raspberry Pi. So at the time, I think it was the Raspberry Pi 2 or the Raspberry Pi 3, single board computer, as you said, but it was still very expensive to put into a product.

00:07:58 Ben Drury: And so we were trying to figure that out. But almost as we were still trying to figure that out, they came out with the Raspberry Pi Zero, which is a bit of a breakthrough moment. This was the $9 Raspberry Pi, so a cut-down version, but it didn't come with connectivity.

00:08:14 Ben Drury: And we started prototyping with that, and we had to add in the wireless connectivity separately. And then almost as we got closer to launch, they then came out

00:08:23 Ben Drury: with the Raspberry Pi ZeroW, which was the small Raspberry Pi, we built in wireless and built in Bluetooth, which was a game changer for us. And it does show you in hardware, you kind of have to look at the

00:08:36 Ben Drury: roadmaps of the underlying technologies and almost sometimes make a guess of where it's going, skating to where the puck is going rather than trying to build on what's there. But there's a lot of risk involved with that, of course. But we've kind of made that call.

00:08:51 Ben Drury: And also, I think we were pretty open-minded with the Kickstarter campaign. We knew that the product we were launching was not scalable. We knew it was too expensive. We basically knew it was a stepping stone to something

00:09:02 Ben Drury: else. And actually, we also knew at that point that Raspberry Pi was not going to be the ultimate solution for us because it was basically overkill for what we needed. As you said already,

00:09:14 Ben Drury: it's a full computer. We didn't need a full computer. It was too slow to boot up, for example, for a kid's products. You know, you can't have a product that takes over a minute to boot up. That's not acceptable to a child.

00:09:25 Ben Drury: So we knew things like that, and we knew it was too expensive. But we also believe that we needed to find product market fit. We needed to prove the concept fundamentally would

00:09:35 Ben Drury: work and there was sufficient demand in order to allow us to build a more mass market version.

00:09:41 Ben Drury: So let me just talk to the Kickstarter campaign. We launched it in November 2017. Pretty modest. We raised about $50,000 on that campaign. And as I think you said to me earlier, before we, started the podcast,

00:09:57 Ben Drury: the Kickstarter funds do not fund a business that is pre-orders of which you probably ultimately not going to make much margin on and certainly not any profit on. So I think

00:10:07 Ben Drury: most Kickstarter entrepreneurs need to be aware of what they're thinking to achieve. And I personally believe that some of the some of the more, some of the unsuccessful Kickstarter campaigns are the ones who've actually raised too much money because they raise,

00:10:22 Ben Drury: they need to take time to scale. update, there's a very different production process for producing something at, say, the tens of thousands of units to the few hundred. I mean, ultimately, we sold only a couple, only like

00:10:35 Ben Drury: two to three hundred units on the Kickstarter campaign. And ultimately, at that first version of product, we only sold 750,

00:10:43 Ben Drury: which was perfect for the scale we were at. We didn't want to do any more than that, because we were basically making it almost, it was almost handmade. So we didn't want any more than that. We wanted that to be stepping stone to the next thing.

00:10:57 Ben Drury: So we did the kicksteller campaign. It was successful. And then in,

00:11:02 Kevin Mako: in 2018, we spent most of that year making that first generation product. It was made in the UK in Sheffield. We had one partner doing injection molding and we had another partner doing the PCB assembly. It was based on

00:11:16 Kevin Mako: the Raspberry Pi Zero W.

00:11:18 Kevin Mako: And we managed to ship that in late 2018. So it took it took a good 10 months or so from when the campaign ended to shipping the product, which was a bit later

00:11:30 Kevin Mako: than we hoped, but I think almost all the Kickstarter campaigns tend to be a little bit later. Yeah, you know what? There's a lot of really, really important things. I just want to highlight here from what you said, from one of the first things you said

00:11:43 Kevin Mako: in coming into this, it's that your first product, you looked at as a stepping stone, your first production run. And that's amazing.

00:11:53 Kevin Mako: You know, you have incredible foresight into this because that also pairs with something else you said about not looking at crowdfunding as a moneymaker. And we've talked about this on the show before.

00:12:03 Kevin Mako: And I think the audience really gets it that your first crowdfunding run is to get the product out there, to get feedback, to get users, to get real strength behind your vision. And to prove that it's viable because people actually whipped out their credit card to buy this thing.

00:12:17 Kevin Mako: But you actually plan for this, which is great. You even used a model you knew wouldn't be your scalable. model, but you use something that could get to market to get that product into people's hands

00:12:29 Kevin Mako: and in its first version, and then you actually planned to improve and iterate around costs and obviously feedback and all the rest. I think that's very powerful, especially for people that are in the development process of their product right now, to think about how can you

00:12:43 Kevin Mako: develop it today to make a great product that really works for your customer? It may not necessarily be a great business model for now because it's when you're building a new product and you're

00:12:56 Kevin Mako: building what could be a multi-million or multi-tens of millions of dollar business, it's very short-sighted to look at that first 50,000 and say, okay, I want to make $10,000 off this first $50,000. And I know it's tough because as a startup, you're looking at that, you know,

00:13:09 Kevin Mako: you've put a lot of money into research, tens upon tens upon tens of thousands of dollars into design and engineering and prototyping. You finally get to market. You finally get buyers. And now all a sudden the money pendulum is shifting the other direction. People are actually starting to pay you

00:13:23 Ben Drury: for your product as opposed to you to develop your product. And it's exciting, but you really need to look at that, especially that first production run as your launch, as your spark and not as the

00:13:35 Ben Drury: end goal. And it's incredible to hear this story from you. And that's what really attracted me to your success story around Yoto is the fact that you plan for that well in advance. And I'm sure that's coming back to your history and working with hardware companies. You knew how it worked.

00:13:48 Ben Drury: You knew how the big companies launched and succeeded with their billion dollar products. So you could trickle that down to saying, okay, well, how does a startup really make an effective plan here? So what I want to know is, based on that successful crowdfunding campaign,

00:14:01 Ben Drury: how did you leverage that to then create the amazing business that Yoto is today?

00:14:06 Ben Drury: Yeah, I mean, I have to say that Yoto is still absolutely work in progress and it's still very, very early days. I mean, we've now sold tens and tens of thousands of our current version compared to that.

00:14:19 Ben Drury: an early version, but we've got a long way to go. To make this business successful, we need to be into hundreds of thousands of units.

00:14:26 Ben Drury: And then it can really fly. I should talk about our business model at some point as well, because we don't make that much money on the hardware itself. It's really the repeat purchasing that drives our business, which is important for people to consider anyone who are doing hardware.

00:14:41 Ben Drury: They've got to consider, are they really going to make the money, the gross margin on the actual hardware product, or is there an alternative revenue stream through services and software and content. But I'll come back to that.

00:14:54 Ben Drury: So, yeah, so post the Kickstarter campaign for us, there were, I guess, there were three main outcomes from it. One was to figure out, can we actually do this? Do we have the right team? Do we have the right skills?

00:15:08 Ben Drury: Do we have the right motivations and desires to produce this, to really go for this? And we already felt the answer, we already knew what the answer. was, but it's good to validate that.

00:15:19 Ben Drury: The second thing was basically we used the Kickstarter campaign as live R&D,

00:15:25 Ben Drury: absolutely live R&D, rather than doing, you know, a bigger company would do focus groups, they would do prototyping, they would be testing for many, many months, even years,

00:15:37 Ben Drury: sometimes many, many years on products and iterating and iterating. We couldn't afford to do that.

00:15:43 Ben Drury: We couldn't afford to do that from a cash point of view, but also from a time point of view, because there was competitive pressure in this space. We already had one competitor who had already reached some level of scale even before we got going.

00:15:56 Ben Drury: So we knew that we had to move fast because otherwise we just wouldn't be in the game. So in a way, we treated the Kickstarter users. And we're very open with them.

00:16:05 Ben Drury: So I think this is part of the appeal with the Kickstarter is that they feel that they're part of their early adopters by definition. But they kind of know their guinea picks, right? They like to feel part of the R&D process.

00:16:19 Ben Drury: So we basically did live R&D with the customers, which was around the software, because we were doing software updates all the time. We were figuring out lots of stuff. We were figuring out what the user experience should be.

00:16:31 Ben Drury: We were figuring out how to sell the product, what the marketing messages, what messages resonated with people. We were figuring out what content to feature. That was very important.

00:16:42 Ben Drury: what content to license what content really really worked so getting the data we were very motivated by data and seeing what the seeing what the usage history was was this a product that people

00:16:56 Ben Drury: will use a lot of kids products would be a product you get a lot of usage in the early days weeks and hours of post-purchase and then there'd be a big drop-off and we didn't see that

00:17:10 Ben Drury: we did not see that we saw repeat usage over weeks and then months and now years consistent usage you get seasonal patterns and you get some you get some obviously

00:17:21 Ben Drury: get some drop off some people just lose interest or for whatever reason or the kids become too old or you know there's lots of multiple reasons but we saw consistent usage and we

00:17:30 Ben Drury: saw that when we released new content for example we saw spikes when people go oh wow there's more yota cards available for my yota peck so we kind of

00:17:40 Ben Drury: if knew we were onto something. It was an early for us, even in those first few hundred. And then there's some expression that you don't actually need that many real users to figure stuff out. You only need

00:17:50 Ben Drury: in a representative sample of something like this, only needs a few hundred, really. So we figured out that, yeah, we're onto something. We knew there was, we knew there was lots of flaws with the

00:18:01 Ben Drury: product from the outset. We knew how to address those. And we were just, we were pretty open with people as well. We said, look,

00:18:09 Ben Drury: well, for example, the first product didn't have a battery, so it always had to be plugged in.

00:18:13 Kevin Mako: We knew that, and the customers knew that. We just, we were very open and transparent about that.

00:18:18 Kevin Mako: But for us, the third thing was ability to attract investment.

00:18:24 Kevin Mako: We knew to do, I mean, to do any tech business, you need to raise money, especially with hardware. I mean, we were doing hardware, software, end content, and trying to

00:18:33 Kevin Mako: build a brand at the same time. So there's lots of uses of funds that we needed. So for us, the, I guess the MVP, which was our Kickstarter product was ultimately the main purpose was

00:18:47 Kevin Mako: to be able to raise investment and to be able to do that live R&D that I talked about. And that was successful. We went from having raised a little bit of angel money. We're talking hundreds of

00:18:57 Kevin Mako: thousands of dollars to then start to raise millions of dollars. And now we've, we just closed our Series A, which was $17 million. So we've gone through that funding journey. Along the way, we managed to get some pretty cool investors.

00:19:11 Kevin Mako: We have Sir Paul McCartney as an investor,

00:19:15 Kevin Mako: the Beatle, and we have the role of our family is also as an investor. So that also helped us along the way. Well,

00:19:23 Kevin Mako: that investment message is very powerful just in itself. And you've had a lot of things, a lot of nuggets in there. But that investment message is really powerful because by the time you have real users

00:19:32 Kevin Mako: who are purchasing your product and giving you that real-time feedback, your potential for raising funds is exponential from what it was before. And that's, you know, that coincides with hardware development.

00:19:45 Kevin Mako: In the early phases, in the very, very early phase, in the idea phase, you know, you're on your own. Once you get into design and prototyping, you may get some seed funding. But then once you actually get the real users, that's when you're into the big bucks into the millions of dollars.

00:20:00 Kevin Mako: And the really interesting thing I think that it pairs with that that you highlight is the fact that you don't need a lot of sales. And this is tremendous because it takes a lot of pressure off startups.

00:20:11 Kevin Mako: When you understand that your crowdfunding doesn't have to be this multi-million dollar major success. In fact, what you said is that that can create problems. And I've seen that as well.

00:20:20 Kevin Mako: It creates problems in scaling because it isn't easy, as great as it sounds, to sell 20,000 units out of the gate.

00:20:28 Kevin Mako: that can take time and that can be difficult to actually procure, especially if you weren't prepared for production going in, which again is a whole separate issue. We heavily recommend to be very well prepared for production before you go into crowdfunding. But if you're caught in that situation that you're not well funded,

00:20:43 Kevin Mako: it's a lot easier to service, like you said,

00:20:45 Ben Drury: in your situation, two to 300 customers, potentially even building some of these things by hand, doing quality control yourself to make sure that they're all great going out the door, making sure that you've got a feedback loop with those customers,

00:20:56 Ben Drury: keeping them involved along that path to ensure that they feel part of the process. They'll be easier on you as well for your flaws if you've kept them in the loop. And that's a big one. Look at the campaigns where there's very little responses to the negative criticism on those campaigns.

00:21:11 Ben Drury: And then look at the ones that have been delayed by months and months, but they respond almost on a daily basis to any concerns or questions from their audience. Night and day difference in terms of the reviews that come through the pipeline. And all that took was communication, which is free.

00:21:25 Ben Drury: and easy to do, especially as the founder, the owner, the manager, whatever, of that product. So when you combine all these things together, it's a very powerful tool. And I think if you're in the early phases of developing a product, it's something to really

00:21:38 Ben Drury: look up to say, look, I don't need to sell tens of thousands of units in crowdfunding. My goal is to get an MVP version of that product, something that's high quality that are users loved, to be interactive with them, especially those first buyers, or at least to be collecting feedback once you've got the units to them.

00:21:53 Ben Drury: and then use that to leverage and scale from there. And one of the big things, obviously, that can help scale is funding. And that's where you really get access to the big bucks, where you never would have had access to it before.

00:22:04 Ben Drury: Absolutely. And just to pick up on that point around the importance of community, it's one of your, I think you have to use your size to your advantage.

00:22:14 Kevin Mako: When you're very small, you have many disadvantages against a bigger company, but you also have many advantages, and I call them almost,

00:22:24 Kevin Mako: startup superpowers and the fact that you can personally respond to every single comment that you get is a superpower because you won't be able to do that when you're a hundred thousand customers it's impossible so use it and nurture that community and you know i spend a lot of time doing that

00:22:38 Ben Drury: myself um because i wanted to learn and and it's incredible that it's free research as you said it's you know even in negative sometimes you have to have a thick skin if you're dealing with a lot of angry customers but work with them understand them and they're getting

00:22:53 Ben Drury: doing you valuable feedback that you'd probably have to pay a lot of money to a research company. You're just getting that for free. And we've taken that philosophy. We're very customer-centric, and we've taken that philosophy all the way through

00:23:07 Ben Drury: from Kickstarter, and now we nurture that mostly on Facebook. So we have, there's a very strong Yoto player community, has nearly four and a half thousand members, and now it's super active.

00:23:20 Ben Drury: I mean, if there's something we do, they don't like, they tell us straight away. but we we ask them we do like feedback Fridays where we ask them questions on what content they'd like to see or what features are like to see so we're nurturing this very strong community

00:23:34 Ben Drury: you have to do it at the early stages because actually gets a lot harder when you become bigger so if you're not doing it when you're small then you're really you're really missing a trick

00:23:44 Ben Drury: that's sound advice so can we unpack that a bit how did you actually you know if you can actually even get into some of the mechanics of it how did you migrate that community from your crowdfunding campaign to then bringing some of those users and then

00:23:59 Kevin Mako: obviously expanding your user base via social media or other community platforms to really get them engaged in your product after the successful crowdfunding campaign yeah that's super important we

00:24:09 Kevin Mako: talked about this a lot because fundamentally the product the version two of the product the more mass market product that we came out with was was way better you know it was like 5x better than the original product and it was way cheaper so we were very

00:24:24 Kevin Mako: conscious of this that, you know, these people had invested in us early and I guess had that earlier adopter,

00:24:31 Kevin Mako: maybe even had the early adopter penalty where you, you know, you paid a lot of money. So we were very conscious of that. And we even talked about giving them all free version two players. We couldn't actually make that work. So we basically did a huge

00:24:45 Kevin Mako: discount, like massive, massive discount. I think 50% off, I think it was. So we try to bring

00:24:53 Ben Drury: and the V1 customers along with us. And the good thing about our product is all of the Yoto cards, which are basically like our cartridges effectively, they also worked. So there was backward and forward compatibility.

00:25:07 Ben Drury: So they weren't really losing out and fundamentally got two players.

00:25:13 Ben Drury: And again, we just communicated.

00:25:15 Kevin Mako: And we gave them early access. We gave them a lot of information about the next generation products.

00:25:21 Ben Drury: So we didn't jettison them. And in fact, a lot of them did migrate to becoming V2 customers. Some of them still use the original product and we still support that original product, although we're trying to get everyone onto the newer product because it just does so much more.

00:25:37 Ben Drury: And it's easier to support and it's easier to upgrade.

00:25:40 Ben Drury: That's quite valuable.

00:25:43 Ben Drury: Giving value to those early adopters so that they don't feel like they were left in the dust. So they don't feel like they understand they were a bit of a guinea pick, but you don't have to treat them like one.

00:25:54 Ben Drury: I'm sure you treat them better and you probably have a little bit more handholding to those original customers because they were early adopters and now you're offering deals and that to migrate them forward to your better product. But that's incredible.

00:26:05 Ben Drury: You used the successful crowdfunding campaign to raise big bucks and then you use that money and that feedback to create a much better product for your second version and then to make it cheaper.

00:26:16 Ben Drury: And then you really looked after those original customers by getting them on board with a new one at a major discount.

00:26:23 Ben Drury: And I think that's a very powerful story to, you know, even if you're in the early stages of developing a product, to think forward about how you'll actually plan that trajectory so that you can take care of all your customers and really have that loyal customer base, that loyal community or tribe around your product.

00:26:38 Ben Drury: Yeah, it's about doing the right thing. Obviously, we didn't make money from those early customers.

00:26:42 Kevin Mako: We definitely lost money on each product. But the insights and the data and the research that we got is almost invaluable. We wouldn't be here throughout that.

00:26:52 Kevin Mako: So we have to respect that and we have to bring those people with us because they're going to be the ones that will be the strongest advocates going forward. Do you have any last tips before we say goodbye into scaling after crowdfunding?

00:27:06 Kevin Mako: I'd say the only thing was on the business model. I think if you're doing hardware, I think very, very carefully about how you make your money. And when you go for funding,

00:27:15 Kevin Mako: the investors are a lot of investors don't like hardware in the VC community. but the ones, the smarter ones, obviously, I believe, they look very careful at two things. One is unit economics. What's the fundamental unit economics of your business?

00:27:30 Kevin Mako: And if you've only got hardware sales, they're going to struggle with that. But if you've got some kind of subscription revenue, investors love subscription.

00:27:39 Kevin Mako: Subscription revenue, if you've got some kind of repeat purchase revenues, that's going to be attractive, especially if it's higher margin, because hardware generally,

00:27:50 Kevin Mako: Depending on your price, price and stuff, I would generally have a high cost associated with it. And then the second thing is to prove out your usage metrics. And the investors that we spoke to were obsessed with cohorts. So they would be looking, for example,

00:28:05 Kevin Mako: let's have a look at the cohort from April 2020, for example. And I want to see the data on usage of that cohort exactly. So are they still using the product? Are they still purchasing?

00:28:17 Ben Drury: How often are they using? How often are they purchasing? And most of these sophisticated investors these days have complicated data models that feed that in. And that will spit out almost like a yay or a nay, whether to invest.

00:28:30 Ben Drury: So you've got to almost think that like they think to understand what they're seeing and trying to engineer that into your thinking and your product. And this, a lot comes back to that feedback you're getting, even from those early customers.

00:28:41 Kevin Mako: Really understand how many of them are using it. Do they like it or dislike it? Are they going to buy your second version of it? Are they going to buy add-on products, which is what you're talking about, right?

00:28:50 Kevin Mako: products where you can eventually, potentially diversify or sell them subscriptions or add-ons or whatever else. And the better you understand these metrics, the better you are to convince an investor to come on board. And that actually can be applied to the early stages. The better that

00:29:04 Kevin Mako: you can see the vision for your product going forward, the more track that that's going to be for an investor. And we talk about it on the show all the time. Margins, margins, margins. If you're creating something new and innovative and special in the industry, you should ensure that you have

00:29:17 Kevin Mako: those margins. If you're a one-off sale, you need to be very sure you have those margins because all you're, the only value you get is from that one product. If you're like in your case with Yoto, you're selling, let's say it reasonably at cost or whatever for the actual base unit and then

00:29:31 Kevin Mako: you've got a subscription model for the cartridges or whatever else. You need to prove it with that model and understand, well, how does that create value for the investors going forward? And it's not just

00:29:40 Kevin Mako: necessarily cash flow. It's how do they scale, how are they able to, how are they able to believe that you can raise more money or how can they raise more money for you or how can they exit at some point

00:29:50 Kevin Mako: time. All that has to do with your, you know, your future success or your proposed future margin

00:29:56 Kevin Mako: value, which, you know, translates into EBITDA, which is your income every year by a certain multiple. And that's the value. And they need to know that if they're coming in at, you know, a million dollars now, how are they going to exit for $5 million in multiple years or how they're

00:30:09 Kevin Mako: going to get that cash flow out if you're, you're more cash place hardware business? All that stuff is very important. Yeah. I mean, especially if you get bigger. I would say if you were to focus just on two KPIs or two metrics, customer lifetime value measured by gross margin, not revenue.

00:30:25 Kevin Mako: So how much gross margin do you think you're able to generate from a customer over their lifetime versus KAC? How much did it cost you to acquire that customer? And you look at the ratio of those two numbers.

00:30:38 Kevin Mako: And that's fundamentally what all investors will be looking at. Absolutely, especially at the bigger phases, right? As you go, in the early phases when you're dealing with angels, a lot of the time, you know, either you or the idea or a combination of that can get you your first,

00:30:51 Kevin Mako: you know, $50, $200,000, $200,000, you know, that's friends and family money, your own personal money, that sort of thing. But, you know, because you're selling, the idea is powerful. You should still understand your metrics. Everybody wants to know how they're going to get paid back.

00:31:05 Kevin Mako: But as you get into the more serious or into the institutional investors, they will be more demanding on real hardcore numbers. So as you, if you want to get it. into, like you did, now you're at your $17 million Series A, you're going to have to have

00:31:18 Kevin Mako: that stuff ironed out. And the best way that you can do that is have it in real customers' hands, use that data, understand your numbers, and project how that's going to grow going forward. Ben, really appreciate you being on the show. Thanks for all your insight today. And looking forward to talk to you again.

00:31:32 Kevin Mako: Thanks, Kevin. Have a good day. Take care. Bye-bye.

00:31:35 Narrator: Thanks for tuning in to this episode of the Product Startup Podcast, the show that teaches you what it really takes to bring your product to market and turn it into a big success. This podcast

00:31:46 Narrator: series is brought to you by Mako Design + Invent, the original and leading firm in North America to provide global caliber in-to-in physical consumer product development to startups,

00:31:58 Narrator: inventors, and small product business clients. If you're looking for product development help on your invention, head over to Mako-design.com. That's m-a-k-o-design.com.

00:32:10 Narrator: for a free consultation from one of Mako Design's Ford Design Studios from coast to coast. Thanks for listening and see you next time.